Why is Proposition 13 Controversial?

In an earlier blog post, we discussed how property taxes are established in California based on Proposition 13, The People’s Initiative to Limit Property Taxation, which was passed by California voters in 1978.

As the State of California continues to experience challenging economic times the subject of Proposition 13 and perceived inequities in property taxation have become the subject of political discourse. As noted in the previous post, a property is reassessed at the time of sale based on the cash or market value at the time of purchase. Assessments in subsequent years may not rise more than 2%.

Here is an actual example based on two similar homes in the Vintage Oaks subdivision in Menlo Park. Each home built in 1997 sold originally for around $1,000,000, and property taxes were approximately $10,000 per year (1% of 1,000,000). One homeowner has lived in his home since he acquired it, and his property taxes for 2010-2011 are around $14,500. The other property has been sold several times in the past 14 years. The current owner purchased the home about 2 years ago, and the current tax bill is $32,400, more than twice the neighbor’s tax assessment!

Locally property values have risen dramatically over the years. In the example above, the property purchased two years ago at around $3,000,000 represents a 200% increase in value. Proposition 13’s limitation on the amount by which property tax assessments can be increased benefits long-term owners by protecting them from paying taxes on “unrealized gains”, and allowing them certainty that their property tax obligation will increase no faster than 2% per year. This has been vital to older home owners on fixed incomes and lower income individuals whose incomes may not rise as quickly as the values of their homes.

Conversely, an argument can be made that newer and younger homeowners are bearing a disproportionate share of property taxes, and that the provisions of Proposition 13 are “unfair”. Those who perceive the inequities of Proposition 13 also often refer to the taxation of commercial properties which do not sell as frequently as residences. Long-term commercial property owners benefit from assessments lower than the actual market value of their properties.

An unintended consequence of Proposition 13 is that some homeowners resist selling their long-term homes with lower assessed values because they cannot afford or do not wish to increase their property tax obligation. We will write about this in a future post.

From a historical perspective it is interesting that Jerry Brown was Governor in 1978 when Proposition 13 was enacted and now, over 30 years later, he is again at the helm as the state faces a difficult financial crisis. Proposition 13 is sure to be part of the dialog!